Do you need to process an x% vacancy factor in a DCF if you already have downtime assumptions between leases?
For example, if you have a multi tenanted property with some leases rolling over year to year, and you already have the downtime assumption of 6 months in there between leases, do you also need to process an additional 5% vacancy factor to all tenant revenue?
Is this the difference between frictional vacancy and stabilized vacancy?
This would be more for a commercial property... for residential properties I don't think you'd model the individual leases because there would be too many, so you'd probably just use a straight 5% or 7.5% vacancy and credit loss factor.
General vacancy is an additional form of conservatism in your underwriting (traditionally gross up revenue by absorption and turnover and then reduce by absorption & turnover). If you're talking Argus, you could be modeling six months of downtime, but if you're running a 70%-80% renewal probability, the blended downtime between leases would really be closer to one-two months. When comparing against the downtime in reality with prior tenant move out, base level capital improvements, TI improvements, etc. for leases, six months may be on the light end. Other way you could run this is to not utilize general vacancy and assume a suite is static through your hold in which the RSF is a % of the total RSF.
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